Enovis Corp (ENOV) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Colfax Corporation third-quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions given at that time. (Operator instructions). As reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Scott Brannan. Sir, you may begin.

Thanks, Shannon, and good morning, everyone, and thanks for joining us. My name is Scott Brannan, and I am Colfax's Chief Financial Officer. With me on the call today, we have Clay Kiefaber, our President and CEO.

The earnings release is available in the investors section of our website, ColfaxCorp.com. We will also be using a slide presentation to supplement the call, which can be found in the investor section of the Colfax website. Both the audio of the call and the slide presentation will be archived on the website later today and will be available until the next quarterly call.

During this call, we will be making some forward-looking comments about the recent estimates regarding future events. These forward-looking statements are subject to risks and uncertainty, including those set forth in our SEC filings. Actual results might differ materially from any statements we might make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law.

With respect to any non-GAAP financial measures mentioned during the call, the accompanying information required by SEC Reg G relating to these measures can be found in our earnings release under the investor section of the Colfax website.

Now, what I'm going to say next is new this quarter. As many of you know, our recommended offer to acquire Charter International will be voted upon by Charter's shareholders next month. Until then, we are very restricted by the UK takeover code in making forward-looking statements. As such, we will not be updating or responding to questions regarding earnings guidance, nor will we provide expectations with respect to Charter's potential impact on our outlook.

However, third-quarter our order intake has exceeded our internal expectations in all end markets, and we believe that referencing historical results like this can assist you in assessing our likely results for the balance of 2011. The Charter acquisition will be transformative for us when completed. Combined sales are expected to approximate $4 billion, and we will be adding an entirely new platform to our Company. As such, we have excluded the transaction costs incurred to date related to this potential acquisition from our adjusted operating results.

And now I would like to turn it over to Clay.

Thanks, Scott, good morning, everyone. I will begin with an overview of our third quarter 2011 results and then I will update you on our operational projects, provide a brief update on the Charter transaction, and then I will turn it back over to Scott for some detailed financial commentary. After that, we will open up for questions.

We were pleased to announce strong results for the third quarter. Adjusted EPS for the quarter was $0.37, an increase of 72%. The cumulative impact of the change in our expected full-year tax rate contributed $0.02 to the adjusted EPS. The operational improvements were driven mainly by strong shipments and the continued improvement in productivity, slightly tempered by lower-margin marine months and amortization associated with the Baric and Rosscor acquisitions.

Net sales for the quarter were $170 million, an organic increase of 10%, while bookings were $175 million, an organic increase of 29%. Average exchange rates in the third quarter of 2011 were significantly higher than in 2010, contributing 7% to the increase in sales for the quarter.

The Baric and Rosscor acquisitions contributed 11% to the 29% total sales increase. The acquisitions contributed approximately $0.03 to actual and adjusted EPS even after their operating profit was offset by $1.2 million of non-cash amortization as well as additional interest expense.

Sales and order growth were driven by broad-based strength in all of our end markets in the third quarter. All end markets showed organic order growth in excess of 9%, and sales were up organically in all markets except Power Generation. Excluding the exited business in the Middle East from 2010, Power Generation sales were also up significantly.

And now for a brief update on our five end markets, and I would appreciate it if you could refer to the slides for specific growth rates for each market. In oil & gas, sales and orders were up significantly for the quarter both organically and with Rosscor's contribution. Overall, we are seeing a lot of quoting activity in this market as the national oil companies, in particular, have increased spending. The strength of this market is broad-based geographically, covering Asia, Latin America and Canada. Pipeline and heavy crude transfer activity remains robust in these geographies. We received two significant pipeline orders this quarter.

Quoting activity is also very strong for multi-phase and gas compression products. As you may recall, we had several very large orders for these products in the second order, which we expect to ship in 2012. On the refinery side, we are continuing to see capital investments and new refinery capacity and maintenance enhancements.

Now for a look at our general industrial end market. Both sales and orders increased in the quarter. Sales were strong in North America, Europe and Asia for a variety of applications, most notably chemical processing, machinery and sales through distribution. Order growth in this end market, while down from the levels experience in the first half year, still remained above 9%.

Turning to Power Generation, sales declined this quarter solely due to our decision to exit certain business in the Middle East. Adjusting for this, sales were up significantly and growth has been especially strong in South America, the Middle East and Asia. There's a large backlog of power infrastructure projects in emerging markets fueled by a significant broad-based demand recovery. We booked a record amount of orders this quarter for this end market, including a very large project in the Middle East.

In Defense, both shipments and orders were up for the quarter. The shipments' order patterns continue to follow the timing of specific ship programs. This continues to be an end market where the large program orders are booked and then delivered over a multi-year time frame. We booked two substantial orders this quarter, including the DDG 1000 program discussed last quarter and another Virginia class submarine order.

In Commercial Marine, sales and orders were up for the quarter. This end market continues to exceed our previously discussed expectations. Quarters also increased significantly over a relatively weak third quarter in 2010. Commercial Marine cancellations were $2 million in the third quarter compared to $4 million in the third quarter of 2010. As discussed in the last several quarters, there were some lower-margin sales in the third quarter. We continue to pursue the initiative discussed in earlier calls to address the margin issues.

Customer service levels continue to improve, and our cost reduction programs are beginning to bring results. We are also increasing our efforts to grow the higher value-added portions of this particular end market. Our Commercial Marine team has been focused on rationalizing our front office and redundant field resources as well. We announced a reduction of our non-customer-facing associates at several distribution centers in Europe and are in the midst of that transition right now. This project, which consolidates customer contact for Commercial Marine applications at our location in Stockholm, will continue to completion in the first half of 2012. When completed, the project will result in streamlined customer service, lower inventory levels and lower cost. Benefits from these actions will be realized in 2012 and beyond.

Operationally, we are also progressing with a plan for rationalization and consolidation that we introduced on last quarter's call. We are in the process of consolidating our Portland plant into a Warren facility. This facility will handle our U.S. Navy business as well as our large two-screw manufacturing. This project will be completed by the end of the 2011 fourth quarter, and the benefit of less facilities and personnel costs will be reflected in the operations in the first quarter of 2012.

Finally, we are nearing the December closure of the skids manufacturing operation in Gottmadingen, Germany. Recall that this facility supplied the Middle East business that we exited last year. Existing business outside of the exited Middle East customer will be absorbed by our other systems locations, and these benefits will be realized in 2012.

Turning now to the Charter acquisition, for those of you who didn't participate in our conference call concerning this acquisition, I will provide a brief summary of the acquisition and the expected time line. And please see both our website and Charter's for more information on the Charter businesses.

This is a transformational acquisition, and we love it for the following reasons. First, it's an excellent strategic fit, highly complements our existing fluid handling business, and each side will enable our vision of a multiplatform enterprise through the addition of a welding and cutting platform. Both platforms will be fueled by strong secular trends.

Second, both ESAB and Howden are leading, established global brands in their respective markets, and they have been around for over 100 years. Both have rich, proud heritages, and we look forward to growing these brands when we move forward.

Third, this transaction will significantly strengthen our position in emerging economies, geographic regions that we expect will grow at higher rates than developed regions in the years to come.

And fourth, these businesses will also provide a better aftermarket mix. 73% of ESAB's business is consumables, and 40% of Howden's is aftermarket. This stream of higher-margin revenues will help mitigate the inherent cyclicality of the business.

Half of the combined businesses will be long cycle and the other half will be short cycle as well, and this will minimize the variability of our business. Finally, both platforms offer a substantial runway for acquisitions and will contribute to long-term inorganic growth.

The transaction will provide approximately $2.4 billion in consideration to Charter's shareholders. This consideration plus repayment of both the companies' existing debt, expenses and other requirements will be financed by $1.3 billion in new equity and $1.8 billion in new term debt. We currently expect the transaction to close early in the first quarter of 2012.

As Scott said earlier, due to UK takeover laws we are very restricted in what we're able to say about future plans and expectations. However, we can confidently say that the acquisition is expected to be significantly accretive and provide a double-digit return on capital within 3 to 5 years. We will also provide cash flow generation -- the cash flow generation is expected to provide a rapid deleveraging of the balance sheet, and the financial structure will provide us with the flexibility to continue with existing initiatives and venture into new areas.

In closing, this is an excellent long-term value creation opportunity, and we are working diligently to consummate the transaction. And now, with that, I'll turn it back to Scott for more details on the financials.

Thanks, Clay. For the quarter, sales were $170 million, up 10.4% on an organic basis. The gross profit margin of 35.6% was essentially flat with the third quarter of 2010.

SG&A expenses were up approximately $11 million, primarily as a result of the $5.7 million related to the Charter acquisition expenses and the additional operating costs of Baric and Rosscor. Excluding the Charter-related costs, as a percentage of sales these costs decreased from 22.6% to 20.7%, due primarily to the positive leverage of fixed cost, given the substantially higher sales volume in 2011. As such, adjusted net income was $16 million, $0.37 a share, up significantly from the third quarter of 2010.

We are currently anticipating a reduction in our full-year 2011 adjusted basis effective tax rate from 32% to 30.5%. The cumulative effect of this is reflected in our third quarter adjusted basis tax rate of 28%. And, as Clay mentioned, this contributed $0.02 to our adjusted earnings per share. The adjusted rate of 30.5% is expected for the fourth quarter.

In the third quarter, increased costs from accounting step-ups and intangible asset amortization for Rosscor and Baric were $1.2 million. The impact of these lower after-amortization margins from Rosscor and Baric is significant. Adjusting for these entities, the incremental flow-through margin on the sales increase is 32% for the quarter and 30% for the first nine months. This reflects a favorable mix compared to 2010, productivity improvements and higher-than-expected sales volume.

As mentioned earlier, we are reporting $5.7 million of expenses associated with the Charter transaction outside of our adjusted net income, as this acquisition is transformative and not part of our recurring business development efforts.

We received a final trial ruling for one of our subsidiaries regarding asbestos insurance coverage. As a result, we have taken a $2.1 million additional provision for asbestos liability cost. This and the trial activity for our subsidiary also resulted in higher-than-expected $3.1 million in asbestos coverage litigation expenses for the quarter.

Finally, restructuring expenses of $5.3 million for the quarter were in line with our previously announced guidance. These expenses relate to the strategic priority programs which Clay discussed earlier.

Net cash flow from operations for the quarter was $13.3 million, and that includes $3.3 million of asbestos-related cash inflows as well as restructuring cash outflows of $1.2 million.

Finally, our backlog stands at $373.4 million at quarter end. And, as we discussed earlier, order growth was strong in all of our end markets, and our book to bill ratio exceeded 1 for the quarter. And with that, I'll turn it back to Clay.

Now we will open up for questions.

(Operator instructions) Jeff Hammond, KeyBanc Capital.

This doesn't seem too apparent in your order book, and you talked about some big wins. But did you see any deterioration anywhere towards the end of the quarter and into October as a result of just macro uncertainty? And maybe more importantly, how is the tone changing or not changing around big capital projects?

An Answer to your first question, we didn't see any decline in terms of the order levels at the end of the quarter. What we are seeing -- and again, I'll just run through the markets. You obviously can see the numbers in terms of the growth rates. But the projects in oil & gas -- one of the things to point out, they are getting larger and they are more significant. And they continue to -- like I said, that quoting activity continues to be strong there.

One of the interesting things is we seem to be developing a bit of a competitive advantage in some of those situations because of our financial stability and being able to take on projects that are over $10 million, that kind of magnitude. So we continue to see strength there and we feel good about what we are doing there.

General Industry, as we described -- it's pretty broad-based. It's still at a pretty significant growth rate. Power generation is one that has been a pleasant surprise. As you know, we had to make up for the exited business and we have landed some pretty large projects there, as we mentioned in the commentary.

And then Commercial Marine -- again, that continues to exceed our expectations. We saw some strength from OEMs over the past quarter. And then Defense, as I mentioned, we had a couple of significant orders that we received there. So just overall, Jeff, it's pretty steady and we are pretty pleased with what we see out there.

One of the things that is helping us that we put in place last year is, remember, we were organized into more of a global functional structure by end market on the front end of sales and marketing. And that is really starting to pay off in the field because now we are much more focused on the customer. We can go in, understand their needs and then sell multi-brand solutions to them. That simply wouldn't have happened before when the businesses were running in a more disparate fashion. And so we are seeing some wins as a result of that.

And then just expounding on this Rosscor comment, what is really driving this robust demand? When you bought it, was that as evident or that has been a pleasant surprise? And then maybe just expound on this where it's enabling new accounts.

No. We felt -- that was part of the thesis for that acquisition. We felt that there was going to be significant demand for multi-phase as well as gas compression solutions. And the real advantage of that is being able to plug that into other parts of the world. They were pretty strong in Russia and some of those areas, but now we are taking them into Latin America, for example, where we are starting to see some traction there and in other parts of the world. So we are very, very confident and feel good about that.

It's not -- I wouldn't call it a pleasant surprise. We had confidence that we could do that. We just needed to plug it in and make sure the integration went well, and that's working out quite well.

And then just a quick final one on the time line for Charter. They presented their same document and they gave a number of dates. How firm are those dates? And what do you see as the big variables for where timing would push to the right?

Well, the filings are complete. And so the next date, essentially, is the shareholder vote for Charter, which Scott mentioned is in November. And then after that, it's onto the actual transaction itself.

The other dating items are antitrust clearance in various countries across the world. And because of the equity raise, the Colfax shareholders have to vote on the issuance of new equity. So as Clay said earlier, our current expectation is that all three of those work streams, which all have to be completed, should allow this transaction to close in the early part of the first quarter of 2012.

Okay, thanks, guys.

John Inch, Bank of America.

Good morning, everyone. First, obviously the business is robust today. Maybe, Clay, could you drill in a little bit more to what some of your European customers are saying? It just seems to be a disconnect, and I get the later-cycle nature and infrastructure nature of your portfolio. But if you look at some of the data, it does suggest the German economy is weakening, for example. Obviously, there's a lot of concern amongst a lot of companies in Europe right now. What are your customers in Europe telling you? And is there some obvious reason why you think or why we should look to the fact that Colfax will be pretty resilient, all else equal, if Europe does, say, slip into a recession?

Right. Well, we have elements, obviously, that are more long cycle. But in terms of Europe specifically, recall that we are not in the southern -- we really don't participate a lot in terms of the southern European countries, you know, Spain, Greece, some of the ones that are struggling more than others. So we've never really been impacted by some of the (inaudible) that's happening there.

In talking about Germany, the growth rates were higher before, but they're still growth rates for us. And then some of the businesses that we sell there actually export to other parts of the world and they are continuing to do that. And as you know, those other parts of the world have higher growth rates. So that's our view on Europe right now.

Yes, that makes sense. What about just as global trade slows? You have seen this playbook before. Right? Commercial Marine is good. What would your expectation set be though, if, you know, let's say we do just go into a much slower global growth dynamic. Does this eventually show up in your orders for the segment, say next year sometime? Or how should we otherwise think about it, based on the shipments, the backlog, what's being built and your forecast?

I think, when we take a look at the backlog, as we pointed out, the cancellations have slowed from in terms of Commercial Marine. That's really the only segment where we had any cancellations of significance. And I think they are being a lot more conservative in terms of the kinds of orders that they're putting in now, anyway. So I don't see anything there.

What we try to do, and I think you know this, John, we take a long-term perspective on these end markets. We feel good about all of these. Goods are going to flow in the world on ships. Oil & gas, in terms of energy needs -- our belief is it's going to be strong over the long-term. There may be some blips in the short-term, same thing with General Industry as well as Defense and Power Gen. Actually, Power Gen is one of the things -- you know those are longer-term-oriented projects. So we think those kinds of things can make it through the cycle.

And then, Scott, why, again, were gross margins -- you actually matched what we had forecast. But can you remind us; why are gross margins flat if you've got this 10% organic volume contribution? Was there sort of a raws issue that -- raws have obviously going to decline, right, so did that help you or hurt you?

Yes, the acquisitions are really the key cause of that. The Baric and Rosscor business, while they performed very strongly this quarter and actually made an operating profit contribution after adjusting for the amortization equivalent to all the rest of our businesses, their effect on the geography and the income statement is significant. They have a much lower gross margin and they have less SG&A expenses. So ideally, that would produce a similar operating profit result.

If you adjust down for that, the operating margins are up significantly. And there is some specific commentary on that in the 10-Q that I would refer you to.

Do you know what the gross margins would have been, Scott, ex-the two acquisitions?

I don't have that number specifically, but I believe there's sufficient information in the Form 10-Q to allow you to arrive at it.

Okay, thank you.

Kevin Mackza, BB&T Capital Markets.

I guess are the Rosscor and Baric amortization charges done now, such that we might see even better incrementals in Q4 and beyond?

Well, done would be an overstatement. No, they are not done, but they are significantly decreasing. Sort of in line with one of our earlier comments about your question about Rosscor, there was very significant amortization when, essentially, the backlog that we acquired at the acquisition date shipped out. That's essentially all completed now.

So there is a recurring level of amortization that will still exist, but it will be less than half of what it was previously. So instead of $7 million, which it will probably be for this year, it will be less than half of that going forward because of the significant amortization that was taken with the shipment of the Rosscor backlog.

Got it. And then incrementals here in the low 30s in the quarter and year-to-date -- so is there any reason to think that we won't see that type of level or even better going forward as you have got higher volumes and some of your restructuring benefits coming through and some of the other just sort of continuous improvement and supply chain things that you plan to do?

I think that's a question we probably can't answer because of the forward-looking restrictions, unfortunately.

Can you talk a little bit about --

Hey, Kevin, what I can tell you, though, is any consolidation or rationalization efforts that we are working on -- we always do that with a view that it's going to enhance revenue potential, operating profit as well as improving our working capital turns moving forward. So as we take a look, not just what we are working on, but obviously we have contingency plans for different economic scenarios out there. That's one of the things that you can look forward to.

Sure. In terms of pricing, in the Oil and Gas space and generally, in Oil and Gas you talked about seeing some larger projects coming into the backlog now. Do those tend to carry the same price and margin? And can you just talk about price trends generally?

Yes. We -- right now, it's really consistent with what we said in the past calls. One of the things that I can say is I feel like we have a better handle from a process standpoint in terms of pricing and how we want to link that to strategy. So I think that bodes well across all of the end markets.

But in terms of Oil and Gas specifically, so many of these projects, even though they are larger and they're -- obviously, there are some competitors, one of the things that we have really been doing a lot of work on is how do we differentiate ourselves from some of those competitors. And so it puts us in a better position from a pricing standpoint, and we feel good about how we are able to do that right now.

Got it. And just finally, from me, so Steve is on board now to tackle the supply chain. Maybe it's too early, but can you comment about what some of the opportunities are there? Can you even maybe address what the gross margin opportunity may be, if some of his initiatives are successful?

Yes. And really, to let you know about Steve, a guiding focus (inaudible), number one, he's really helpful with CVS, so we take that to a much higher level. And that's policy deployment as well as all of the application of lean and ensuring that we get our team of talented folks in so that we can drive that certainly deeper and broader in organization, especially with the eminent acquisition of Charter here.

In addition, what I want him to do and what he's going to do from a supply chain standpoint is take a much more strategic view of it. So imagine if you look at the world and you look across all the facilities, all the way from our customers back to our suppliers' suppliers, I want to know what those value streams really look like so that we can value-stream that and map that just like we would internal to a plant, to look for opportunity in waste that we can eliminate because, as we do that, it's going to contribute to working capital, operating profits and revenues moving forward because so much of that limits some of the responsiveness to even the customers that we might want to have from a lead time standpoint.

So, that's the view, if you will, that I want him to take more strategically that will lead us down to the detailed project for what we implement.

Okay, I appreciate that, thank you.

Mike Halloran Robert W. Baird.

So, just to be clear on all the profitability-oriented questions here, there's nothing that was in the third quarter from a margin standpoint on the operating side or even on the gross margin that, on a go-forward basis, isn't sustainable? Obviously, very good quarter from a profitability, improvement from the operating profit standpoint. And it sounds like everything is sustainable and there should be some levers to pull as some of these initiatives go through a go-forward basis.

Let me just comment that I don't think we can specifically answer that, but I will answer it in this way, that there are no one-off items in there. So this is a naturally reported quarter without any distortions other than the Charter transaction cost that we have called out.

And then Oil and Gas side, I'm just trying to get a sense for the kind of normal revenue sequential pattern that you guys see through a year. It looked like the revenue line for Oil and Gas was down sequentially from Q2, and that's something I'm particularly concerned about, given the strength of your order book. But I'm just trying to figure out how things look, and I understand there's a little bit of lumpiness there. But I just wanted a feel for how things trend through the year, if there's anything behind why you saw the revenue decline sequentially and things like that.

I'll take the revenue decline, and then I will let Clay comment on the rest of the question. As we mentioned the second quarter, we had two very large shipments out of the Rosscor business in the second quarter, so that business is, just by its nature, going to have fairly significant -- it's going to be some large quarters and some quarters that are not quite so large. We had a good quarter in Rosscor this time, as we have discussed earlier. But we didn't have the volume of shipments that we had in the second quarter. That's the major difference from that sequential revenue result.

Yes, and those are huge project, too, Mike. So that's just something to keep in mind, especially as we get into next year as well.

But a normal sequential pattern through the year, if you can adjust for those projects, would be building through the year, if I remember correctly?

Well, that is typical for the business as a whole. These large projects can cause distortions to that overall pattern, and we do try to call them out in the quarters where we have large shipments. So absent the effect of that, that would be an accurate statement.

I appreciate the time.

Jim Lucas, Janney Capital.

First question, Commercial Marine -- you talked in your prepared remarks about some of the changes that you are making, looking at focusing on more value-added offerings. I was hoping you might be able to flesh out that comment the little bit more about what specifically you are doing about the go-to-market strategy in Commercial Marine.

Well, we have been examining and driving a different process this year in terms of strategy for all the end markets, and we are about to finalize that process for this year. But one of the things with regard to Commercial Marine, just to take an example -- energy efficiency is pretty important on a ship. So some of the things that we are working on, again, to provide more value would be how do we provide more energy-efficient solutions. And that's especially where the application of some of the smart technology, we've got some really good ideas and some things that we are working on and feel that's going to have an impact in that particular end market.

Okay, and with regards to changes you've made with regards to the customer-facing side of the business, focusing on more of an end market approach, you talked about having some examples of multi-brand cells. Could you maybe talk a little bit further about where you've seen that success in particular end markets, going in and touching across multiple Colfax brands?

Yes. It cuts across -- I can think of examples right now -- in Oil and Gas, General Industry and Power Gen, as I'm looking, quite well, as well as Commercial Marine and Defense. So it cuts across all of them. But the initial success that we've seen with that specifically -- I can think of examples in Oil and Gas, for example.

And what happened before, Jim, was, as the businesses were operating as disparate entities, say the Warren sales team might -- they could have gotten an RFP or an RFQ from a potential customer out there, and they would just keep it to themselves and look at it more as a two-screw kind of solution, instead of opening it up more to understand what the real customer requirement was and then addressing it as one Colfax team. And that's a significant difference, and we've had success this year where, now that we have a global Oil and Gas team that sells the multiple brands, they've put together solutions that are a combination of two- and three-screw, and we've been able to go out and get the business. And those are products that ship to multiple locations around the world.

So that just wouldn't have happened before. And that's kind of thing that we are driving with the leadership and organization structure that we put in place. And we are focused on end markets and customers.

Very helpful, thanks. And then final question -- understand the project nature of the business can lead to some lumpiness. When you look at some of these larger projects, will there be a potential impact on margins? Do these projects tend to carry lower margins at the beginning and ramp over time? Or can you just talk a little bit, to the degree you can, about the potential lumpiness on the margin side?

Yes. Each one of those situations is going to vary from a competitive standpoint. But again, our focus strategically from a pricing standpoint gets back to being able to provide a differentiated solution. And we feel good about some the tools that we've got to be able to do that. And Smart is one of those tools that we've got right now.

So that's our challenge is to go out there and make sure that we can provide real value to the customer and that we can show them from an economic standpoint how that makes sense.

Let me just give you an example, and it's one that I've used before. But when it came to transporting highly viscous oil, the competitive alternatives were pretty large centrifugal pumps. We were able to go in, even though the three-screw solution caused more on the front end, we were able to go in and prove to them and saved a significant amount of money over the five- to six-year life of that project because 80% of it is electricity. And we were able to show them how we could mitigate the cost of that. And so the customer understood it and bought the solution.

It's those kind of opportunities that we do very well with.

Great, thank you.

Jason Feldman, UBS.

So first, just briefly on Power Generation, pretty good order activity there. What's the primary driver? Is this your customers ramping production of gas turbines, or are there other sorts of projects out there that -- this primary driver here?

No, it's a combination. Some are secondary sources. We help with secondary sources, and actually one of the major ones this time was a primary source. But it's across the board.

Okay. And then, just a couple of quick clarifications on asbestos. The higher asbestos liability and Defense cost in the quarter -- did I understand properly that that was kind of a one-time adjustment as opposed to a new run rate where we are this quarter?

That's correct. There's $2.1 million of a one-time adjustment related specifically to the final trial ruling.

Okay. Based on the final trial ruling and whatnot, is there any change in your expectation that the coverage litigation expense should start coming down, once we get past this year?

No. Well, let me try to answer that in a way that I can. The trial activity is over for one of our subsidiaries, is going to conclude in the near-term for a second one of our subsidiaries. So, given the fact that we will not be having the same level of trial activity, I think it's a reasonably safe assumption that the cost will go down. And I'm afraid that's probably all I can say about it.

Yes, that's what I'm looking for, thank you very much.

Joe Mondillo, Sidoti & Company.

I just had one question. I just wanted to get an update on the restructuring. What was spent on the $5.3 million in the quarter? And where are we in the restructuring and sort of the globalization of your corporate offices that you are doing right now?

Well, I think the best way to answer that would be to refer you to the Form 10-Q. There is a significant -- there's a footnote that lays out all the details of exactly what was spent on the restructuring. There wasn't any corporate office restructuring is this particular quarter. We did have a little bit of that in the third quarter, when we moved our headquarters. There's nothing related to future acquisitions or anything of that nature.

While we can't give any guidance as to total restructuring, I think we can say that the restructuring is in line with the guidance we gave at the end of the second quarter. And so we are progressing at the pace and spend rate that we expected to progress at. And I would refer you to the footnote in the financial statements for the specific details of what the restructuring was spent on.

Can you just talk broadly where we are in the whole process, what you've done and what you still intend to do?

Well, I think we -- Clay did talk about each of the specific projects. And I think, as he said, there has been a significant progress on all of them. But, as we discussed both this quarter and last quarter, we expect to complete these projects by the middle of 2012 and that the financial benefit will be reflected primarily beginning in 2012. There is no new update to the spend rate and benefit numbers that we discussed last quarter.

As far as the future, we are always looking for continuous improvement opportunities, but we have not announced any additional restructuring projects yet. It wouldn't be appropriate to speak about them until they've reached a higher level of certainty.

Okay, great, thank you.

I'm showing no further questions at this time. I would now like to turn the call back over to Scott Brannan for closing remarks.

Okay. Well, I appreciate everyone's attendance this quarter and we look forward to updating you again next quarter. Thanks a lot of have a good day.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.